Wednesday was another ugly day on Wall Street.
Stocks tanked, wiping out gains for the year in both the Dow Jones and S&P 500 Index. The Dow fell 608 points and the S&P 500 shed 3%. The Nasdaq plunged 329 points and lapsed into a correction territory. It was the largest daily decline on Wall Street since 2011.
In his most recent podcast, Peter Schiff asked a key question: will the Federal Reserve swoop in and change the nature of the game?
Peter noted that the drop in the NASDAQ ranked as the third-largest in history. The two biggest declines both came in 2000 as the dot-com bubble burst. Of course, in percentage terms, there have been some steeper drops, but not since the 2008 crash.
“The fact that this is the biggest single-day decline in the NASDAQ since the 2008 financial crisis means that today’s drop is larger than any point drop that we had during the 2008 financial crisis. You have to go all the way back to the dot-com bubble. Something big is happening when you see this kind of drop. I mean, the market technically couldn’t be weaker … this is a bloodbath.”
There was also some bad economic news yesterday. New home sales came in way below estimates and dropped to near a two-year low, falling 5.5% to a seasonally adjusted annual rate of 553,000 units in September. That was the lowest level since December 2016. The August number was also revised down. Of course, rising interest rates are not good for the housing market.
And there are also problems in the commercial real estate market, but artificially low-interest rates have masked the issues. As Peter put it, we’ve been on a huge credit bubble.
“How do you think the Fed was able to engineer the rise in real estate prices, the rise in the stock market? This whole phony recovery was based on debt — based on going deeper and deeper into debt. Well obviously, once you raise interest rates, that’s it.”
Lowering rates, launching QE and creating bubbles is the easy part. It’s the normalization that’s hard. As Peter put it, “Anybody can get drunk. The hard part is sober up.” In the wake of 2008, the mainstream continues to believe the Fed won; the Fed’s plan worked. But they were celebrating prematurely.
So, will the Fed do something to change the dynamics? Will Jerome Powell sweep in and try to rescue the stock market with elections looming? Pres. Trump has certainly been putting the pressure on. He needs a scapegoat because he’s been running around claiming the US is in the midst of the greatest economy in the history of the world.
“If that’s the case, well, obviously it can stand 2% interest rates. The reason the economy is imploding with 2% interest rates is because it isn’t the greatest economy in the history of the world. It’s simply the biggest bubble in the history of the world. And the bigger the bubble, the smaller the pin that it takes to pop it. And this bubble has been popped and the air is going to come out.”
Peter has said the recession is obviously coming. The mainstream still doesn’t see it. People still point to the 4-plus percent GDP growth last quarter. But as Peter pointed out, the economy always looks strong right before a recession.
“Nobody expects recession. Everybody is very optimistic just before the economy goes into recession. Remember the Great Recession, which was the worst recession since the Great Depression … it started in December of 2007. But nobody knew we were in it even the summer of 2008. Everybody thought the economy was great. Everybody was talking about how great the economy is — it was in recession at the time and people still thought it was great. It was only after the financial crisis, after the market imploded and Lehman Brothers went bankrupt, that’s when people talked about the economy being bad. That’s when the Fed started to cut rates, or slash rates, in order to bail it out, because everybody was so clueless.”
The question is what will the Fed do? It could take upcoming rate hikes off the table in order to prop up the markets. But even that might not work. Or it could stand pat and let things run their course. That might be the best medicine in the long-run, but probably not politically viable.